Clearing a path
Myanmar is winning plaudits for making it easier to start a business. But day-to-day operations are still at the mercy of a cumbersome and confusing bureaucracy in serious need of reform.
- For close to eight years, Myanmar has been on a journey of economic, social and political reform as it rejoins the world economy after decades of isolation under ruinous military rule.
As one of the fastest growing economies in Asia with a sizeable young population and rich natural resources, the country of 53 million has the potential to play a pivotal role as the global economic pendulum swings from West to East.
The challenge for Myanmar now is to seek ways to fully benefit from globalisation, as less developed countries with weak links to the global economy risk falling behind, according to U Thaung Tun, chairman of the Myanmar Investment Commission (MIC).
"The gap between developed and developing countries remains immense and the widening income inequality within nations has become a serious challenge of our time," he said.
To reach its potential, the country needs more foreign direct investment (FDI) in a number of strategic economic sectors. But investors have been deterred by outdated laws and a confusing and inefficient bureaucracy, among other factors.
"Myanmar is committed to economic liberalisation and stable political transition. The government has initiated a wide range of reforms to open its economy further to trade and investment. Recent measures include efforts to modernise the legal and regulatory framework," said Thaung Tun.
Despite some challenges, international financial institutions are still optimistic about Myanmar and project that it will continue its steady economic growth, helped by economic reforms, strong global growth and higher FDI flows.
According to the World Bank, Myanmar's gross domestic product (GDP) expanded by 6.4% in fiscal 2017-18, up from 5.9% in the previous year, thanks to a strong recovery in agriculture, manufacturing and services. It forecasts 6.8% expansion for the current fiscal year ending in March 2019, while the Asian Development Bank (ADB) expects 7.2% growth.
"Myanmar has been asleep for six decades. We have opened up and we used to reach 8.5% economic growth. There was a hiccup but we now expect to grow by 7-8%" Deputy Finance Minister Set Aung told Asia Focus.
As the economy grows, rising demand creates new opportunities, "but the challenge is how we can attract investors transparently and how we are able to attract investors to match the demand", he added.
"We want to make investment predictable and create a new system and infrastructure -- both soft and hard -- and be proactive in inviting foreign investors and stakeholders in the country."
The recent enactment of the new Myanmar Companies Law (see story on page 3), replacing a colonial-era law on the books since 1914, is being hailed as a way to create more transparency and attract foreign investors in key strategic sectors.
The significant change is that the country will allow foreigners to hold up to 35% in businesses that were previously restricted to Myanmar nationals only.
As well, both foreign and local businesses will be required to use a new online registry, Myanmar Companies Online (MyCO), to create transparency and greatly reduce the paperwork associated with starting a business.
"There will be no discrimination between domestic companies and foreign companies," said Aung Naing Oo, the director-general of the Directorate of Investment and Company Administration (Dica).
"For a country to take this bold move to be more transparent is a huge leap forward in attracting FDI. … [The new law] will allow companies to invest with more confidence," said YY Chen, managing director of Tung Mung International Pte Ltd (TMI), a Singapore-based garment manufacturer with factories in Vietnam, China and Cambodia.
Ian Teo, head of business banking at Standard Chartered in Singapore, said the new law would give more confidence to businesses interested in Myanmar.
"As investors are driven by the certainty and potential of the financial returns from their investments, what matters most is how the country can continue to deliver stability and ensure consistency in the application of regulations," he told Asia Focus.
"This will be key to attract more foreign investment from Singapore and other countries."
William D Greenlee Jr, managing director for Myanmar with DFDL, a regional legal, tax and investment advisory firm, hailed the law for bringing about "a positive improvement in the simplicity of doing business in Myanmar".
Allowing 35% shareholding by foreigners without changing the status of a local company will attract foreign investment in a number of new market segments, he believes.
"This and other regulatory reforms have been contributing to the increased understanding that Myanmar is working toward a modern, transparent investment climate."
Yuwadee Thean-ngarm, director of the Myanmar office of the Southeast Asian regional law firm Tilleke & Gibbins, said the law was drafted in line with best international practices and could bring about a transformative change to the economy.
"It will increase investors' confidence in the country, and the further removal of red tape will allow more investment inflow. However, some foreign investors may still be hesitant … due to the situation in the Rakhine state, among other things," she said, referring to international condemnation of the persecution of the Rohingya minority in the country's northwest.
Karlo Pobre, deputy managing director of the real-estate firm Colliers International Myanmar, cautioned that the law needs to be reinforced with liberalisation of other investment sectors.
He expects to see more local-foreign partnerships formed, especially in fast-moving consumer goods (FMCG), real estate, manufacturing and retail among others.
"However, the immediate results may initially start slowly given the time needed for proper due diligence along with streamlining the implementation of the law."
A local business executive, who spoke on condition of anonymity, said MyCO should be welcomed as the first step in a move toward effective e-government services. "But MyCO alone is not likely to make a significant impact to attract FDI as company registration is just a piece of the big economic jigsaw picture," he said.
"MyCO should be effectively linked and integrated with different ministries and government agencies to resolve investors' pain points. In addition to company registration and filing, it should also support other areas such as applying for permits and licences, for customs clearance, and be able to track approval of those permits and licences."
TMI's Mr Chen suggested that in addition to company registration, MyCO should also support tax declarations, import and export permits.
Sher Hann Chua, a consultant with Tilleke & Gibbins, said MyCO would make due diligence on prospective local partners easier for foreign investors. And while the portal alone would not lead directly to a significant rise in FDI, it would improve investors' confidence in the country's business and economic outlook.
THEORY VS PRACTICE
Despite the ambitious commitment represented by the new law, investors see it as a small piece of the puzzle. It remains to be seen how effectively the government can facilitate and support projects once they start to take shape.
"Challenges to attracting FDI in Myanmar are more complex and deeper due to other socio-political issues affecting investor sentiment and confidence," an executive of a local business conglomerate told Asia Focus on the condition of anonymity.
"Reform of the legal framework alone will not and cannot guarantee attracting foreign investment in the immediate and short term. … Myanmar has enormous potential but the government needs to do more work to attract foreign investors, including clearness of policies and quicker decision-making."
He sees reform of the finance and banking sector as an immediate priority, as the country needs a more favourable legal atmosphere for international institutions.
In addition to a robust banking system that can support efficient international transactions, authorities need to address land costs, infrastructure readiness, logistics costs, labour laws and availability of skilled people, he added.
Mr Chen noted that in the garment manufacturing sector, although Myanmar presents an attractive opportunity, the sharp increase of land prices could deter some operators.
Another concern of local and foreign investors is poor coordination and limited authority of various agencies.
Myanmar's civil service faces myriad challenges, including a dearth of professional and administrative talent in a country where universities were closed for nearly two decades after 1988. As well, many old-school civil servants accustomed to dealing with soldiers have little idea about how to function under a civilian administration.
Dica is considered a progressive organisation but it has limited authority when it comes to issuing permits and licences and actually implementing projects.
"There are a number of union ministries as well as state and regional governments that hold certain authorities for issuing, holding or cancelling projects and business licences and permits," a source familiar with the matter told Asia Focus.
"Dica alone will not create and lead a fair and competitive investment landscape in Myanmar. Significant improvement is needed at different ministries, state and regional governments as they play even more important roles during the phase of actually executing business activity and investment projects. Intra-ministry, inter-ministerial and cross-agency coordination should be improved."
Currently, obtaining licences and permits can take up to a year and the approval journey is not easily traceable.
For instance, if a foreign or local company wants to open a retail fuel filling station business, the company will need a permit and licence for each station after securing registration and an MIC permit.
The process requires neighbourhood approval from the local authority, a business permit from the regional government, a fire department certificate, a distribution licence from the Ministry of Electricity and Energy and a fuel storage permit from the Ministry of Natural Resources and Environmental Conservation.
John Hancock, a Thailand-based consultant with decades of experience in regional cross-border investment, said Dica is an administrative, regulatory and investment promotion body that can only work within the constraints imposed by existing laws and the relevant ministries.
To create a fair and competitive landscape, he says, it would be a bold but beneficial stroke for the government to open up virtually the whole manufacturing sector to 100% foreign ownership with land ownership or long-term usage rights, similar to what Thailand did in the 1970s.
Mr Hancock supports majority foreign ownership in strategic service industries, including financial and insurance services. "Such investors will set international standards, bring in skills, create employment and train and develop Myanmar nationals, who will in turn will become big local players," he said.
He sees the new Companies Law as a difficult fit given the nascent development stage of the country.
"(The Law) is an amalgam of the latest and most sophisticated laws now applicable in fully developed common law countries such as the UK and Australia, dropped into an ancient legislative, judicial and administrative environment," he said.
The law and related regulations, he said, would sorely test the implementing agencies and raise a multitude of interpretation issues. Developing clarity and consistency in application will take a long time.
"In the short to medium term this will put a large burden on the bureaucracy, result in a high degree of frustration and uncertainty, and cause additional difficulty and cost for the business community," he said.
Mr Hancock also pointed out that the law relates only to the establishment and management of companies, such as stipulating what is considered a local or foreign business.
Consequently, other relevant laws such as the Investment Law have to be reviewed to identify restrictions on investment incentives or land rights on companies considered foreign.
"A 35% foreign shareholding is much better than zero … but it is not much of an incentive for a significant capital investment by foreign investor," he said.
Domestic businesses, meanwhile, will have better opportunities to work in partnerships and joint ventures with foreign companies than in the past.
"They will benefit by working in partnership with foreign companies because the latter will potentially bring additional capital and financing, knowledge and technical know-how and global experience, which are seriously lacking in most local companies," said a local business operator.
But domestic players will need to significantly improve their internal governance and reporting, and consequently their transparency, added Mr Hancock.
"This will be more burdensome on them, but the increased burden will result in improved governance and compliance will in turn give more confidence to lenders, investors, suppliers and other third parties dealing with them. In due course it should evolve into something good for all," he said.
Santhapat Periera, a partner at Tilleke & Gibbins, said that intellectual property protection and data protection are also areas of concern in Myanmar.
"There are draft intellectual property laws pending before the Parliament, and it is hoped that these bills will be enacted into law very soon," he said.
Colliers' Mr Pobre said a general review of legal issues related to real estate should be done in consultation with practising professionals to align laws with international standards.
"A review of current provisions such as parking regulations, especially for condominiums, land use and zoning plans, as well as implementation and regularisation of recently enacted laws such as the Condominium Act would be prime examples for possible areas of development," he said.
The regularisation and licensing of real estate professionals such as brokers and valuers would also greatly help to raise standards in the industry, he added.